Retail View: Supermarkets must adapt to survive

by Tim Linden | May 29, 2014

Recently, publicly traded Safeway Stores put itself up for sale and found a suitor. Many looked at the sale and opined that the mega-supermarket format has passed it prime, with the firm being worth more to investors if it is sold and broken into pieces than if it continues to operate as one of the nation’s largest supermarket chains.

A couple of supermarket experts weighed in on the subject and agreed that adapting and changing to the current set of circumstances in the United States is the key to success in the retail food industry.Phil Lempert

“Through history and for many years, people have decried the death of the supermarket format,” said food industry consultant Frank Dell, president of Dellmart & Co., a Connecticut-based firm. “But they have survived. What is dead is what I call the 8-80 marketing concept.”

He explained that supermarkets were founded on the concept of being everything to everybody. They were there to fill the shopping needs of everybody from 8 to 80.

“That concept has been outdated for 20 years,” Dell said.

Yet some retailers continue to cling to the idea and they have trouble surviving. But many others do not. They find their niche and prosper.

“Unless you are the only store in town, the 8-80 marketing concept doesn’t work,” he said.

He said there are many different formats serving consumers today including high-end stores, limited-assortment formats, discounts stores, dollar stores, super centers and general merchandise stores. Even convenience stores and drug stores have gotten into the business of providing milk, coffee, cereal and other grocery essentials. No format has a corner on the market.

To survive, he said food retailers have to do two things.

“You have to understand your customer and know who you want your customer to be,” he said. “And you have to quit complaining about your losses. You can’t be all things to all people. Figure out what you do best and do that.”

Another longtime observer of the supermarket industry is Phil Lempert, who bills himself the “Supermarket Guru” and writes under that moniker. He has a harsher assessment of the mega-supermarket chain, but his opinions are very similar to Dell’s.

“The days of the 40,000- to 60,000-square-foot supermarket are over,” said Lempert. “We are going to see a lot more butcher shops and specialty stores that offer consumers a food experience.“

Lempert believes smaller, regional chains that can tailor their offerings to the local clientele will prosper, but the national supermarket will have trouble. Those operations are seeing their sales cannibalized from all ends. He said Target and Walmart are taking their price-sensitive shoppers while Trader Joe’s and Aldi’s are taking the customers looking for that food shopping experience.

Though both men said the national chains’ days are numbered, they did express optimism about Kroger’s chances to survive.

“Kroger has brilliant customer data analysis,” said Lempert. “That has kept them alive, but they should be looking at what’s next. In the past 10 years, the conventional supermarket has lost 15 percent of its market share and that is going to continue. That model is broken and is going out of business.”

Dell agreed that Kroger is a very good operation that has invested its profits wisely and continues to innovate. He said it will need to do so to continue to prosper.

Both men also pointed to a new entry to the food shopping game that could be a game changer: home delivery. While home delivery has not done well since it surfaced more than a decade ago, Dell believes it will make inroads with high-end shoppers.

“The trouble is the delivery part,” he said. “It is just very expensive.”

However, he said Amazon is making a run at it and could be successful. “Everyone is all excited about the millennials, but don’t forget the baby boomers. They are still the largest buying block and their driver’s licenses are soon to be taken away [as they age]. Home delivery can be successful, but it is going to be higher-priced.”

Lempert said both Amazon and Google see home delivery of groceries as an area of growth and he wouldn’t bet against them. He believes that is another format that will take sales away from the traditional supermarket.

It is this incremental shaving of supermarket market share that Lempert sees as problematic for that format. Dollar stores grew sales during the recession, he said, and then “got a little lazy and have taken a hit since then.”

But he said they have started to figure out their role. Because of their constantly changing product line, Lempert said “they provide people with an adventure.” He said they need to capitalize on that niche and continue to find innovative items for their shoppers.

He also believes Target is going to make big inroads, especially with its “Archer Farms” brand. He said they have a great opportunity to expand that brand and sell more perishables.

Dell also likes Target’s entry into groceries and believes the retailer will continue to grow that segment of their business.

It is in the area of perishables where Dell sees the more traditional supermarkets making their mark. And he said that’s a good thing, as fresh produce, meat and other perimeter-store sections have higher margins. The center-store items are the main thing offered by alternative formats, and they are least profitable for traditional supermarkets, he said.

If a supermarket can capitalize on the perishables, which they can do better than the general merchandise stores or discounters, he believes they can continue to play an important role for the U.S. consumer.

Both men also had good things to say about the Fresh & Easy format that England’s Tesco couldn’t quite get right.

“I was very disappointed in what Tesco did with Fresh & Easy,” said Dell. “They had a nice small format with great products but their decorations sucked.”

He said the color scheme and layout of the stores were all wrong for U.S. shoppers and they moved much too quickly on their own private label without letting it grow organically. He predicted that someone else will put a better face on the package and will be successful.

Similarly, Lempert likes the size of the Fresh & Easy stores and believes a well-known banner such as Wild Oats could make them very successful.

Speaking of some other formats, Lempert said the problem in declining profits that has been publicized about Whole Foods is all about markup.

While conventional supermarkets survive on 1.5 percent net margin, Whole Foods has had net margins of around 8 percent. That has been very difficult to maintain as competition increases.

He believes the rise of ethnic chains will continue in areas where the demographics warrant it. However, he did warn that ethnic groups tend to acculturate into American eating habits very quickly and are soon looking for many of the same items as their Anglo counterparts.

Dell made the same point, stating that many of the ethnic markets in the Southern California region that he has studied have found that for continued growth they need to carry more traditional items to satisfy their customers, including the Anglos shopping their stores.